Core view
On April 7, the Federal Reserve released the minutes of the interest rate meeting to further guide the potential rhythm of table contraction and interest rate increase. In combination with the latest monetary policy guidelines, we updated our views on US bond yields and the US dollar: under the background that the short-term inflation expectation has not yet peaked and there is still room for linear enhancement of tightening expectation, we raised the forecast of the high point of 10-year US bond yields in the year to about 3%, and the peak time is expected to be in May; The US dollar may break through 100 in the short term driven by austerity expectations.
The scale reduction intensity is further clarified. The upper limit of the starting speed in the earliest or may is US $95 billion / month, which is lower than the theoretical upper limit
On April 7, the Federal Reserve released the minutes of the interest rate meeting to further guide the potential rhythm of table contraction and interest rate increase. There are four signals from the aspect of table reduction: first, the table reduction may be started as early as may; Second, the upper limit of the speed of table reduction may be US $95 billion / month, which constitutes us $60 billion national debt + US $35 billion MBS; Third, it is possible to speed up to the upper limit of the shrinking speed according to the rhythm of three months. If the market or economic conditions change, the duration may be extended; If extrapolated according to the experience of linear acceleration of scale reduction in 2017, the speed of scale reduction will gradually increase at the rate of US $35 billion / month, US $65 billion / month and US $95 billion / month; Fourth, this table reduction will not involve active selling, but mainly passive table reduction by reducing due reinvestment. The upper limit of the scale reduction rate this time is in line with our previous prediction (please refer to the previous report “the actual tightening intensity of the Federal Reserve may be less than expected”). On an annual basis, the scale of the scale reduction is around us $1100 billion, of which the scale of government bonds is around us $700 billion. From the perspective of the size of the Federal Reserve’s debt holdings (calculated from the dimension of treasury bonds), the maturity size of the Federal Reserve’s treasury bonds in the next year will exceed US $120 billion (US $493.6 billion due within three months and US $738.1 billion due within 3-12 months), which is much larger than the scale of reduction. It can be seen that the Federal Reserve has not reduced the table according to the theoretical upper limit for the time being.
In terms of interest rate hikes, the minutes further pointed out that if future inflation continues to exceed expectations, several FOMC members believe that one or more interest rate hikes of 50bp can be carried out in the future interest rate meeting, which further echoes Powell’s attitude in his previous public speech.
It is expected that the Fed will suspend raising interest rates in the second half of the year, but it may raise interest rates by 50bp in May and June, and the contraction will last longer than raising interest rates
Our previous report pointed out that the goal of the Fed’s control focuses on inflation expectations. The essence of the current hawkish attitude is to suppress inflation expectations through tightening expectations. After inflation expectations fall, the current hawkish attitude of the Fed may not be able to be continuously fulfilled. Based on our judgment on the rhythm of inflation (it is expected that the current round of upward inflation growth in the United States is expected to peak in March or April, and the inflation expectation will gradually decline. For details, please refer to the previous report when the CPI of the United States will peak under the Ukrainian crisis),
We expect the fed to raise interest rates three times in March, may and June of the year. It is expected that the interest rate increase and contraction will be carried out step by step in the first half of the year, and the interest rate increase and contraction will be suspended gradually in the second half of the year, but it obviously lags behind the interest rate increase. The constraints on the difficulty of short-term tightening stem from financial stability (for the risk of further upside down of the yield curve, please refer to the previous report “how to understand the recent upside down of US bond interest rate?”, The more important constraint of the whole year comes from the decline of inflation expectation, and the primary goal is to gradually give way to growth. The essence of this round of inflation is supply. Monetary policy is a demand side regulation tool. The negative damage of continuous interest rate hike on the demand side is greater than the positive inhibitory effect on inflation. In the second half of the year, after the downward inflation expectation and the elimination of the risk of runaway inflation, the Fed continued to tighten or suspended.
The verification of two dimensions predicts that the high point of US bond yield in the year is about 3%, and the peak time is expected to be in May
We update our view and judgment on US bond yields. First, maintain the judgment that the current round of upward US bond yields will peak in May. On the one hand, CPI has not peaked in the short term, and there is still room for inflation expectations to rise; On the other hand, when there is still room to enhance the tightening expectation, it is expected that there is still room for the US bond yield to rise (the tightening intensity does not reach the theoretical upper limit, and it is still possible to increase if inflation worsens further; the expectation of 50bp interest rate hikes during the year is still possible to increase). After the interest rate meeting in May, with the peak of inflation and the landing of tightening expectation, the yield turned downward.
In terms of the high point of the year, we expect it to be around 3%. We adopt two methods to calculate the yield of US bonds, which is divided into short-term interest rate and term spread. The high point is near 3.15%; By dividing the yield into inflation expectation and real interest rate, it is estimated that the high point is near 2.9%. Considering the average two calculation results, we raise the 10-year US bond yield to about 3% (refer to the following). The falsification of the interest rate increase expectation in the second half of the year will drive the US bond yield to fall higher than expected.
The yield of US bonds is split according to the short-term interest rate and term premium, which may reach 3.15% corresponding to the peak of the year
We can divide the yield of US bonds into short-term interest rate + term spread. The former is greatly affected by the interest rate increase, and the policy interest rate adjustment can directly raise the short-term interest rate. We can measure the priced expectation of interest rate increase through the change of short-term interest rate; The latter is greatly affected by the Fed’s quantitative easing (or table contraction). The buying and selling behavior of the fed at the long end can directly affect the term spread (the average asset duration of the Fed is 7.6 years, and the debt holding structure is dominated by long-term bonds). On April 7, the closing interest rate of 10-year Treasury bonds was 2.61%, of which the term spread was – 0.52% (subject to the term spread calculated by the New York Fed) and the short-term interest rate was 3.13%.
In terms of short-term interest rate, since the Federal Reserve cut interest rate to zero in 2020, the calculated short-term interest rate has dropped to 1.24% at the lowest level, and has now risen to 3.13%. The increase of short-term interest rate reflects the expectation of raising interest rate close to 190bp. If calculated according to the market expectation of 50bp interest rate increase in May and June and 25bp interest rate increase per month, the annual interest rate increase is 225bp. According to the current pricing range of 190bp, the expectation of 35bp has not been reflected. In the future, it may be priced gradually with the further rise of inflation and the enhancement of tightening expectation.
In terms of term spread, the Federal Reserve expanded its balance sheet by 320 billion US dollars in 2020, and the average term spread of the corresponding period was – 0.86%; From 2021 to now, the average monthly expansion scale is 105 billion US dollars, and the average term interest margin of the corresponding period is – 0.15%; If it is roughly estimated according to the corresponding relationship between the average monthly speed of quantitative easing and the term interest margin, the reduction of the table during the year will further increase the term interest margin by more than 20bp. If it is roughly estimated based on this, the yield of 10-year US bonds may further rise to 3.15%.
Split the US bond yield according to inflation expectation and real interest rate, and the corresponding high point in the year is around 2.9%
We can also split US bond yields into inflation expectations and real interest rates for cross validation. As of the reporting date, the implicit inflation expectation in the 10-year US bond yield was 2.83%, and the real interest rate was – 0.22%. In terms of inflation expectations, considering that inflation has not peaked in the year, there is still room for further upward inflation expectations in the short term. For example, there is still room for upward growth of more than 10bp based on the previous 2.94% in the year. In terms of real interest rate, the recent tightening expectation of the Federal Reserve has driven the real interest rate to rise sharply. If the zero interest rate level before the epidemic is the best, there is still more than 20bp upward space. The total upward space of the two is about 30bp. Combined with the current 10-year US bond yield point, the corresponding high point in the year is around 2.9%. Based on the previous calculation results, we believe that the high point of US bond yield in the year is around 3%.
Driven by the expectation of tightening, the US dollar still has upward space in the short term, and the high point may exceed US $100
In terms of the US dollar, driven by austerity sentiment in the short term, there is still room for upward movement, and the peak may exceed US $100. In the second half of the year, the interest rate hike was not as strong as expected and the downward pressure on the US economy resonated (the European replenishment will also lag behind the start of the US). The US dollar index is expected to return to the downward channel and return below 95.
In terms of US bonds, as mentioned above, the current round of US bond yield rises. We expect the high point to be near 3.0% and the peak time to be near May. Q210-year 2-year term spread may show a repetitive upside down.
In terms of U.S. stocks, asset prices will gradually desensitize after the normalization of confrontation between the United States and Russia in the future, and the asset price correction due to the impact of risk appetite will be gradually repaired. In the short term, US stocks still need to return to the main line and pay attention to the impact of the expectation of future interest rate hikes and the downward resonance of corporate profits on US stocks. There is limited space for Q2 sharp correction, but it is difficult to make outstanding performance, and there is a high probability of maintaining the shock trend; After the interest rate increase expectation in the second half of the year was gradually falsified, the economic downturn expectation was superimposed, and the rebound opportunities of growth stocks were concerned.
In terms of gold, in the short term, the price of gold also rose sharply, which is in line with our early judgment; After the conflict is gradually normalized, it is expected to pull back from the current high level. However, we are still optimistic about gold throughout the year, especially the decline of the second half of the US dollar will drive the gold price higher. Throughout the year, we believe that the London gold price will exceed US $2000.
Risk warning: the epidemic situation exceeded expectations, resulting in the extension of the easing cycle; Inflation exceeded expectations, leading to rapid tightening by the Federal Reserve; There is an error in the measurement method of the high point of US bond yield.
